Goldman Sachs: Prefer BRL/HUF/MXN/ZAR for FX Carry Basket Construction

Overview

This report, within Goldman Sachs’ Global Markets Daily framework, provides an in-depth analysis of current FX carry strategy performance and optimization pathways. With implied volatility declining following the U.S.-Iran ceasefire agreement and the USD flat year-to-date, investor interest in FX carry has revived. The report evaluates spot returns, carry yields, and sensitivity to risk variables across differently sized long/short and long-only carry baskets. The core conclusion is that while overall carry levels remain stable, strategies focused on a select few currencies perform better. The report explicitly recommends BRL, HUF, MXN, and ZAR as primary long positions and suggests using EUR, SEK, and THB as funding currencies to optimize risk-adjusted returns.

Core views

Market data over the past year shows FX carry strategies have generally performed well, though with significant internal dispersion. Baskets containing fewer currency pairs (e.g., 2–3) delivered superior spot returns compared to broader baskets. This largely reflects that high-carry currencies often exhibit higher risk sensitivity (Beta), which generated excess returns amid cyclical asset recovery. Additionally, long/short strategies slightly outperformed pure long strategies in total returns, primarily because USD depreciation caused traditional funding currencies to appreciate, partially offsetting carry advantages—but the long/short structure mechanically provided a higher base carry. On specific currency selection, the report emphasizes combining carry levels, terms-of-trade dynamics, and idiosyncratic events. The Brazilian Real (BRL) stands out due to the highest real policy rate among EMs, improving terms of trade, and positive beta to risk sentiment. The Hungarian Forint (HUF) benefits from major post-election economic policy shifts and potential euro adoption prospects. The Mexican Peso (MXN) offers exposure to the U.S. cycle with limited vulnerability to rising energy prices. The South African Rand (ZAR) has upside potential in a geopolitical de-escalation scenario, supported by constructive local fiscal and monetary policy outlooks. In contrast, the Colombian Peso (COP) faces uncertainty ahead of the May 31 presidential election, while the Indian Rupee (INR) suffers from deteriorating terms of trade, pressuring its performance. Funding currency choice critically shapes portfolio risk characteristics. Analysis shows that USD-funded carry baskets currently exhibit extremely high risk-on behavior and a strong negative correlation with oil prices (i.e., they perform better when oil prices fall). To neutralize this exposure to energy prices and risk sentiment, the report recommends EUR, SEK, and THB as funding currencies. These not only offer higher carry returns (particularly SEK, which boasts an excellent carry-to-vol ratio) but also enhance portfolio resilience to energy price volatility. For investors seeking a more defensive stance, the Chilean Peso (CLP) is also a reasonable funding option.

Analysis framework

The institution combined quantitative backtesting with qualitative fundamental analysis. First, it constructed long/short, long-only, and short-only carry baskets with varying numbers of currency pairs (2–5), ranked by smoothed 12-month carry and rebalanced monthly, then backtested spot and total returns over the past year. Second, regression analysis quantified sensitivities (Betas) of these baskets—under different funding currencies—to key risk variables: S&P 500, U.S. 10-year real yields, oil prices, and copper prices. Finally, recommendations were cross-validated against Goldman Sachs economists’ forecasts for real policy rates and changes in terms of trade to identify preferred longs and optimal funding currencies.

Methodology notes

• Industry/Sector Analysis Framework

  FX Carry Strategy Construction and Optimization

  Profiting from interest rate differentials by going long high-yield currencies and short low-yield currencies. The report demonstrates how adjusting the number of currencies in the basket and selecting specific funding currencies ('Funders') can balance carry returns against risks (e.g., sensitivity to oil prices or equity markets).

• Industry/Sector Analysis Framework

  Terms of Trade and FX Linkages

  Analyzing how a currency issuer’s status as an energy exporter or importer affects its exchange rate under energy price fluctuations. For example, energy-exporting currencies (e.g., BRL, COP) see improved terms of trade and FX support in high-oil-price environments.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Currency Sensitivity to Risk Assets (Beta)

  Measuring how FX portfolios respond to global risk sentiment (e.g., S&P 500) and commodity prices (e.g., crude oil). Higher beta implies stronger outperformance during risk-on periods but larger drawdowns during market stress.

• Valuation Methodology

  Carry-to-Vol Ratio Analysis

  Dividing carry return by volatility to assess risk-adjusted efficiency. The report notes that currencies like SEK, when used as funding sources, offer more attractive risk-adjusted returns.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• BRL (Brazilian Real)

  Top Long Pick

  Strengths

  Highest real rates in EM, improving terms of trade, positive beta to risk sentiment

  Weaknesses

  Election asymmetry has diminished since early year but focus hasn’t fully shifted

  Comparison

  Superior to COP, which faces near-term election noise

  Risks

  Global risk-off reversal

• HUF (Hungarian Forint)

  Top Medium-Term Long Pick

  Strengths

  Major post-election economic policy shift, improved EU funding relations, potential euro adoption

  Comparison

  More attractive carry and carry-to-vol ratio versus EUR

  Risks

  EU relationship setbacks

• MXN (Mexican Peso)

  Top Long Pick

  Strengths

  Linked to U.S. cyclicality, less vulnerable to high energy prices

  Weaknesses

  Net energy importer, marginal terms-of-trade deterioration

  Comparison

  More insulated than ZAR in high-energy-price environments

  Risks

  U.S. economic slowdown

• ZAR (South African Rand)

  Top Long Pick (Geopolitical De-escalation Scenario)

  Strengths

  Constructive local fiscal/monetary outlook, expected 50bp rate hike

  Weaknesses

  Previously lagged peers with high carry

  Comparison

  Should outperform MXN if energy prices fall

  Risks

  Renewed geopolitical tensions

• COP (Colombian Peso)

  Cautious / Avoid

  Strengths

  Appreciation over past year supported spot returns

  Weaknesses

  Presidential election on May 31 introduces noise; central bank decisions influenced by electoral factors

  Comparison

  Lower risk-reward appeal than BRL

  Risks

  Election outcome unfavorable to markets

• INR (Indian Rupee)

  Cautious / Bearish

  Weaknesses

  Negative terms-of-trade shock, external balance weakened

  Comparison

  Underperforms among Asian high-yield currencies

  Risks

  Persistently high energy prices

Key data

• BRL Real Policy Rate ForecastHighest among EMsQ4 2026 forecast exceeds pre-conflict levels, supporting high carry
• South African Reserve Bank (SARB) Rate Hike Forecast50bpReport expects 50 basis points of hikes this year, supportive of ZAR
• USD-Funded Basket CharacteristicsHigh risk-on, negatively correlated with oil pricesRegression analysis over past 9 months shows high sensitivity to risk sentiment when USD is used as funder
• Preferred Funding CurrenciesEUR, SEK, THBOffer higher carry and hedge energy price risk; SEK has superior carry-to-vol profile

Impact & implications

The report argues that in the current environment of falling volatility and delayed rate-cut expectations, EM FX carry strategies still have a favorable window for performance. By shifting from broad index-like exposures to carefully selected currencies and optimizing the funding leg, investors can maintain high carry while effectively managing exposure to energy prices and global risk sentiment. In particular, for investors concerned about oil volatility or seeking to reduce portfolio beta, switching to EUR or SEK funding represents a key tactical adjustment.

Risks

• Sudden deterioration in global risk sentiment causing sharp drawdowns in high-beta currencies
• Sharp energy price swings impacting terms-of-trade-sensitive currencies
• Election outcomes in countries like Colombia triggering market volatility
• Unexpected central bank policy shifts (e.g., premature rate cuts)

What to watch

• Trend in implied volatility
• Rate paths of the Fed and major EM central banks
• Further evolution of geopolitical tensions (especially in the Middle East)
• Dynamic changes in countries’ terms of trade driven by energy prices